What’s Next For BAE Systems plc?

Defence giant BAE Systems plc’s (LON:BA) future prospects.

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BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) is one of the largest defence and aerospace companies in the world. It has aircraft, shipbuilding, armoured vehicles, armaments and defence electronics businesses.

It has leading market positions in the US and UK, as well as substantial businesses in Australia, India and Saudi Arabia. In 2012 it made £1 billion profit on revenues of £17 billion.

Recovering after a difficult few years

The company has been through a difficult few years, with decreasing revenues and earnings per share. Many jobs have been lost, and the company’s share price bottomed below 300p during the eurozone crisis of 2011. But after a period of consolidation, the company has been steadily recovering, and earnings are increasing again.

The recovering profitability of the company has led to a resurgence in BAE Systems’ share price, which now stands at 429p. This puts the company on a P/E ratio of 10, with a dividend yield of 5%.

So is BAE Systems still a buy? Well, the picture is complex. In the US the company expects sales to decrease, as the defence budget is reduced. In the UK, the picture is stable, with steady sales expected over the next few years.

An opportunity in emerging markets

There is opportunity in BAE’s other markets to grow sales and profits, particularly as growing emerging market economies spend a larger proportion of their growing GDPs on defence. As one of the world’s leading defence companies, with an emphasis on high-tech warfare, BAE stands to benefit.

Is the world becoming a safer place? Well, I suspect some parts are, and some parts aren’t. But there will always be business for a defence company. I suspect BAE Systems is evolving to gain from the increase in emerging market defence spending, rather like Unilever in the world of consumer goods.

Technology and innovation is central to BAE System’s strategy. It is a leading player in the field of cyber-warfare. It is developing a range of technology to fly fighter aircraft as if they were uninhabited air vehicles (UAVs). These planes can sense and avoid bad weather and other aircraft, and they can sense safe landing areas.

BAE Systems has also developed Falcon: a secure battlespace internet, that links together voice, data and video. It is also developing Taranis: an unmanned stealth aircraft.

Foolish conclusion

Overall, I think that BAE Systems is a value and high-yield play that is worthy of a place in your income portfolio. I wouldn’t expect rapid growth — this is a solid performer with the prospect of dividend growth.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Prabhat owns shares in none of the companies mentioned in this article. The Motley Fool owns shares in Unilever.

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